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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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April 28, 2008 12:01 AM ET
Landov
SCORCHED SCOT Recent losses forced Sir Fred Goodwin, group chief executive of RBS, to do a massive rights offering to recapitalize the bank.
U.S. and European banks have continued to report dismal results. Credit Suisse also announced a new write-down of $5 billion last week. Earlier this month, Citigroup reported a loss of $5.1 billion for the first quarter, after taking a $13.8 billion write-down. So far this month, big U.S. financial companies, including Citi, Merrill Lynch, Goldman Sachs and CIT Group, raised a collective $28 billion by selling debt and preferred stock. That amount makes Royal Bank of Scotland's £12 billion ($23.9 billion) rights issue, or sale of stock to existing shareholders, seem massive. Last week the bank posted £5.9 billion ($11.7 billion) in write-downs. The RBS news drew mixed reactions from the credit rating agencies. Fitch downgraded the bank, Moody's placed the bank's Aaa rating on review for downgrade, and Standard & Poor's chose to keep the bank on negative watch, where it has been since last July. Despite the huge amount of capital that RBS needs to raise, some analysts viewed the news as a positive. “We think the write-downs are severe enough to persuade the market that the worst is over—it is even possible, depending how market conditions develop, that RBS could see some write-ups and recoveries from these levels,” CreditSights analyst Simon Adamson said in a report. One measure that analysts view as having wider implications for European banks is RBS's decision to hike its targets for tier one capital—share capital and reserves, including a certain percentage of preferred stock, less intangible assets and other regulatory deductions—to between 7.5% and 8.5% of its total risk-weighted assets. In the U.S., regulators dictate that banks here must have a tier one ratio of at least 6% to be considered well-capitalized. More symbolic was the decision to raise UBS's “core” tier one capital percentage, as it is known in Europe, which excludes preferred stock and other so-called innovative securities, to a more stringent 6% from 4.5%. “Of greater importance to the ratings is the rights issue and [RBS's] accompanying statement that it has set itself new capital targets,” S&P analyst Nigel Greenwood said in a report. “This new policy represents a fundamental shift in [RBS's] attitude toward capital management, having previously targeted—but rarely approached let alone exceeded—a ratio of around 5%.” Prior to RBS's announcement, it was the most undercapitalized bank in Europe. Mr. Adamson said RBS's decision to boost its capital reserves could have repercussions for other European banks. “The most obvious victim of RBS's new Puritanism could be Barclays, which had a core tier one ratio of just 4.9% at the end of 2007, and which also faces high write-downs in 2008,” he said. Indeed, all eyes are on Barclays, which on Thursday released a statement in advance of its annual general meeting. In the statement, group chief executive John Varley said Barclays' core tier one ratio was 5.1%, below its target of 5.25%. “This is a time for strong ratios, and we want to see our equity ratio at least 5.25% in time,” said Mr. Varley. But neither in the statement nor at the annual meeting did Barclays management say whether the bank would need to write down impaired assets or announce a rights issue when it reports results next month. That left some analysts with a bad taste in their mouth. Alex Potter, an analyst at Collins Stewart, cut his rating on Barclays from buy to sell on the news, and in a report called the Barclays statement “short of detail, but materially concerning,” adding, “there are no specific comments on write-downs or consensus and no update on capital.” Mr. Potter estimates that when the bank issues results next month, it could have write-downs of £6.2 billion ($12.3 billion). To achieve a core tier one ratio of 6%, Barclays would need a rights issue of approximately £8 billion ($15.9 billion), he said. More telling for U.S. banks could be RBS's updated valuations of its portfolio of troubled assets, including subprime, Alt-A and commercial mortgages. That's particularly true for Citigroup, which has been one of the U.S. banks hit hardest by the credit crunch. At the Citi shareholder meeting last week, CEO Vikram Pandit said “we are closer to the end” than the beginning of the credit crisis. Prior to its write-down last week, Citi had written down $18.1 billion in the first quarter. As of the first quarter, Citi has a tier one capital ratio of 7.7%, above its target of 7.5%, and a tangible common equity to risk-weighted managed assets ratio of 6.2%, below its target of 6.5%. In a conference call with analysts, Mr. Pandit said he did not think Citi would be able to achieve the target ratio in the second quarter, as had been the goal. RBS slashed the valuation of its Alt-A mortgages by 50% this year. It wrote down its Alt-A portfolio by £666 million ($1.3 billion), bringing Alt-A exposure to £1 billion ($1.98 billion). RBS's Alt-A write-down was larger than its subprime write-down of £405 million ($806 million), which reduced its subprime portfolio to £600 million ($1.19 billion). “These figures look pretty conservative, and we think it is unlikely these areas will produce further significant losses,” said CreditSights' Mr. Adamson. In its first-quarter conference call, Citigroup said it had reduced the value of its Alt-A portfolio by approximately 17%, to $18.3 billion, and taken a $1 billion write-down. The bank wrote down its subprime portfolio by $6 billion, bringing its exposure to $29.1 billion. Following Citi's earnings announcement last week, investors, who had been fearing even worse results, sent shares up as much as 8% in intraday trading. “Catastrophe aversion seems to win points in this market,” said CreditSights analyst David Hendler. But investors may no longer think a catastrophe has been averted if Citi reports a third round of such write-downs. FW
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